The rules for partnerships vary from one organization to the next, largely due to whether a partnership agreement exists. Under the existing regulations, your partnership needs a written, signed agreement. If none is in place, the partnership will dissolve if one of the partners dies. If that partner has left his share of the business to his family and included succession planning in the agreement, a spouse or a grown son or daughter could become part of the partnership. With this document in place that stipulates succession procedure, you can choose who you will work with in the future.
Here’s what a partnership agreement does, what can happen without one, and risks for both scenarios.
A partnership agreement, among doing other things, often outlines in writing what will happen if one of the partners dies. In this document, partners come to an agreement about how or whether the business will move forward after a partner dies. In some agreements, the partners choose to leave their portion of the business to their family. When one of them passes away, their designated family member will take over their duties to the business.
What Happens without a Partnership Agreement
Without a partnership agreement, the current form of the partnership dissolves in the event of the death of one of the partners. This doesn’t necessarily mean that the business itself is finished. The remaining partners can decide to carry on together. They simply need to sell the partnership’s assets to pay off any debts, split the remaining proceeds, and set up a new partnership.
Risks for Both Scenarios
As you can see, both scenarios—having an agreement and foregoing one—have their own risks. Without one, you won’t inherit your deceased partner’s family. But you might be forced to pay them their share of the company quicker than you anticipated. With a partnership agreement that stipulates succession of a family member, you might be forced to work with a new person, but you’ll know that beforehand and be able to prepare.
Agreements are customizable and only work well when tailored to the needs of each partner involved. If you need help writing and reviewing a partnership agreement to protect yourself and your partnership, be sure to talk to an attorney who specializes in business law.
Want to make sure you know what will happen to your partnership in the event of a death? Call Casal & Moreno for help.